The stock market remains volatile, and consumer price data is indicating significantly higher-than-expected inflation. The Consumer Price Index rose 6.2% in October from a year earlier, its steepest annual climb in almost 31 years. Although equities, in general, perform poorly during inflation, specific sectors, including energy, tend to shine amid an inflationary environment.
The energy sector has beaten inflation 71% of the time and delivered an annual real return of 9% per year on average. This is primarily because energy-focused companies’ revenues are tied to energy prices, a key inflation component. Higher energy prices lead to higher revenues and profits for energy companies.
So, as energy prices continue to climb, we think it could be wise to invest in quality energy ETFs—Energy Select Sector SPDR Fund (XLE), Vanguard Energy ETF (VDE), SPDR S&P Oil & Gas Exploration & Production ETF (XOP), and iShares U.S. Energy ETF (IYE). These ETFs have an overall A (Strong Buy) rating in our proprietary POWR Ratings system.
Energy Select Sector SPDR Fund (XLE)
Launched by State Street Global Advisors, Inc., XLE is one of the most popular energy ETFs. It seeks to track the performance of the Energy Select Sector Index and the S&P 500 Index. In addition to exposure to the U.S. energy industry, the fund has many of the world’s largest oil producers in its holdings.
With $27 billion in assets under management (AUM), XLE’s top holdings include Exxon Mobil Corporation (XOM), with a 22.53% weighting in the fund, followed by Chevron Corporation (CVX) at 20.25%, and EOG Resources, Inc. (EOG) at 4.72%. It currently has 23 holdings in total. Over the past three months, the ETF’s net inflows were $382.72 million. In addition, its 0.12% expense ratio compares favorably to the 0.46% category average.
XLE pays a $2.16 annual dividend, which yields 3.73% at the prevailing share price. Its four-year dividend yield stands at 5.42%. Its dividends have increased at a 3.35% CAGR over the past three years and 3.26% over the past five years. Over the past year, the fund has gained 71.3%.
It is no surprise that XLE has an overall A rating, which equates to Strong Buy in our proprietary POWR Ratings system. In addition, it has an A for Trade and Buy & Hold grade, and a B for Peer grade.
Vanguard Energy ETF (VDE)
The Vanguard Group, Inc.’s VDE invests in companies that operate across energy sectors. It tracks the performance of the MSCI US Investable Market Index (IMI)/Energy 25/50.
XOM has a 20.77% weighting in the fund as its top holding, followed by CVX at 16.76% and ConocoPhillips (COP) at 6.33%. VDE has $5.47 billion in AUM. Its net inflows came in at $938.12 million over the past year. Its 0.10% expense ratio is lower than the 0.46% category average.
VDE pays a $2.87 dividend annually, yielding 3.52% at the current price. Its four-year average dividend yield stood at 3.81%. The fund has gained 77.5% over the past year and 18.7% over the past three months.
VDE’s strong fundamentals are reflected in its POWR Ratings. It has an overall A rating, which translates to a Strong Buy in our proprietary rating system.
It has an A for Trade grade and Buy & Hold grade, and a B for Peer grade. VDE is ranked #2 in the Energy Equities ETFs group. To check all the ratings of VDE, click here.
SPDR S&P Oil & Gas Exploration & Production ETF (XOP)
Launched by State Street Global Advisors, Inc., XOP invests in companies that operate across energy, oil, gas, consumable fuels, oil and gas exploration, and production sectors. Its exposure to the exploration and production sub-sector of the energy market makes it useful for those looking to target stocks looking to discover and access new deposits of oil and gas.
The fund has $3.89 billion in AUM. Its top holdings include Callon Petroleum Company (CPE) with a 3.62% weighting, SM Energy Company (SM) at 3.39%, and APA Corp. (APA) with 3.03%. It has 56 holdings in total. Its 0.35% expense ratio compares favorably to the 0.46% category average.
XOP pays a $1.35 annual dividend, which yields 1.26% at the prevailing share price. Its average four-year dividend yield stands at 2.09%. In addition, its dividends have increased at an 8.9% CAGR over the past three years. Over the past year, the fund has gained 121.3% and generated 34.8% returns over the past three months.
XOP’s POWR Ratings reflect solid prospects. It has an overall A rating, which equates to a Strong Buy in our proprietary rating system. In addition, it has an A for Trade and Buy & Hold grade.
XOP is ranked #3 out of 45 ETFs in the Energy Equities ETFs group. Click here to see XOP’s rating for Peer grade as well.
iShares U.S. Energy ETF (IYE)
Launched by BlackRock, Inc., IYE invests in companies that operate across energy sectors. Its holdings include many big oil companies that are responsible for significant portions of the global energy supply. IYE tracks the performance of the Russell 1000 Energy RIC 22.5/45 capped index.
XOM has a 20.18% weighting in the fund as its top holding, followed by CVX at 16.43% and COP at 7.48%. IYE has $2.50 billion in AUM. Its net inflows were $1.45 billion over the past year. The funds’ 0.42% expense ratio is lower than the 0.46% category average.
IYE pays an $0.83 dividend annually, yielding 2.61% at the current price. Its four-year average dividend yield stood at 4.94%. The fund has gained 75.9% over the past year and returned more than 19% over the past three months.
IYE’s strong fundamentals are reflected in its POWR ratings. It has an overall rating of A. It is also rated A for Trade, Buy & Hold, and Peer grade. Click here to get all the IYE ratings. It is ranked #4 in the Energy Equities ETFs group.
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XLE shares rose $0.09 (+0.16%) in premarket trading Tuesday. Year-to-date, XLE has gained 58.93%, versus a 26.26% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets. More...
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